This Week in State Tax

Alabama has decoupled from the federal amortization of research expenditures provided in Internal Revenue Code (IRC) section 174. Under the new law, an Alabama taxpayer may immediately deduct “research and experimental expenditures” without regard for the amortization method that took effect for federal purposes in tax year 2022. (Alternatively, a taxpayer may decide to treat the expenditure as a deferred expense as was permitted under the pre-2022 version of section 174.) This provision is retroactive to all tax years beginning on or after January 1, 2024. Please contact Gregory Aughenbaugh with questions about H.B. 163.

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Alabama recently enacted H.B. 191 (Act No. 2025-280) that will significantly alter the applicability of state sales and use tax exemptions to county and municipal sales taxes in the state. The Alabama Local Procedures Act and the Local Tax Simplification Act of 1998 restructured Alabama local tax administration substantially by generally requiring the local sales taxes in over 450 jurisdictions to conform to the state sales and use tax base and procedures. This framework is altered by H.B. 191.

Under H.B. 191, any new legislation that enacts or amends a sales and use tax exemption will apply only to the state sales and use tax, and not to county and municipal taxes, unless a) the legislation explicitly allows  local governments to opt into the exemption, and b) a local governing body adopts a resolution or ordinance to incorporate the exemption into the local tax.  The ordinance or resolution must provide that the exemption is to become effective on September 1 of a given year, and it must specify the duration of the exemption. The local governing body is to provide notice to the Department of Revenue (Department) by July 1 that the exemption is to be adopted, and the Department is to maintain and publish a list of localities that have adopted sales tax exemptions under this procedure. A locality may also rescind the adoption of an exemption by a similar ordinance or resolution and notice to the Department.

The new law does not amend or repeal any sales and use tax exemption made generally applicable to localities by a law enacted prior to H.B. 191. There are, however, about 20 state sales and use tax exemptions enacted by the legislature in recent years that were not applied to local taxes unless a locality opted into the exemption. Under the new law, all localities will be deemed to have opted out of these exemptions effective September 1, 2025, unless they adopt a new resolution or ordinance incorporating the exemption into the local tax, as well as provide notice to the Department by July 1 and set forth a September 1 effective date. For questions regarding H.B. 191, please reach out to Scott Jackson and  Justin Stringfield. 

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The Alaska legislature recently adopted market-based sourcing for the sales of services and sales of other than tangible personal property. Currently, these sales are sourced to Alaska if a greater proportion of the income-producing activity is performed in Alaska (based on costs of performance). Under the revised sourcing rule, sales of services and other than tangible personal property would be considered in the state if the taxpayer’s market for the sales is in the state. The market for the sale of a service would be in Alaska if the service is delivered to a location in the state. Intangible property that is utilized in marketing a good or a service to a consumer is considered used in the state and assigned to the state if that good or service is sold to a consumer in Alaska. In addition, if the state or states of assignment cannot be determined, the state of assignment shall be reasonably approximated, and if the state of assignment can be neither determined nor approximated, the sale shall be excluded from the denominator. The bill would also update the definition of apportionable income to be consistent with the latest recommendations of the Multistate Tax Commission.

The new legislation would also require taxpayers engaged in “highly digitized businesses” to calculate their Alaska apportioned income based solely on their Alaska sales factor, rather than using the default three factor apportionment formula. A taxpayer is engaged in a highly digitized business if 50 percent or more of its Alaska sales consist of: (1) intangible property delivered by electronic transmission; (2) services delivered by electronic transmission; (3) services related to computers, electronic transmissions, or Internet technology; or (4) tangible personal property delivered to Alaska from Internet sales, if the Internet is the primary mode of customer access in Alaska. The bill is currently before Governor Dunleavy. He has indicated he may veto the measure as part of a dispute with the Legislature involving public education funding. Please contact Jonathan Edmonds with questions about S.B. 113. 

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